How To Earn Over 10% in Bitcoin Arbitrage Funds

Most people limit their investing to stocks and bonds. And these are indeed good investments. But what if you want to diversify beyond traditional investments? Although there are several alternative investments, few have the track record of Bitcoin arbitrage funds. The fund I’ve allocated some money to pays about 12.95% annually.

What is Arbitrage?

Investopedia defines arbitrage as “buying in one market and simultaneously selling in another, profiting from a temporary difference. This is considered riskless profit for the investor/trader.”Think of it this way: you see a car on sale at a dealer for $20,000. You know someone on the other side of town is willing to buy this car for $21,000. You could call that person up, tell them you’ll sell them the car for $21,000, buy it from the dealer for $20,000, and you’ve made $1,000 for little or no risk!

What is Bitcoin?

Bitcoin is a digital currency that can be bought, sold and traded online. It isn’t controlled by central banks and only a finite number of Bitcoins will ever be created. Coindesk has a great article with more background on what bitcoin is.

What is Bitcoin Arbitrage?

Bitcoin is traded on a variety of exchanges: Kraken, Coinbase and BitBays are just a few examples. At any given time the price of bitcoin is different on the various exchanges. For example, Bitcoin could be trading for $500 on Coinbase, but $501 on Kraken. So, you could simultaneously buy 1 Bitcoin on Coinbase for $500 and sell it on Kraken for $501 to make $1. Doing this manually would be time consuming and only worth it with large sums of money. Instead, BitBays created a fund that does the arbitrage automatically.

There are three flavors of Bitcoin Arbitrage Fund at BitBays: BTC, USD, and CNY. Each of them works the same way: the fund automatically buys and sells bitcoins on various exchanges to reap profits. The only difference between the three funds is the currency the profits are stored in and the yield paid.

If you were to invest in the BitBays USD arbitrage fund, although the gains still come from buying and selling Bitcoins on different Bitcoin exchanges, those profits are then converted and stored in dollars. This way, your profits are not vulnerable to bitcoin price fluctuations.

Risks

Of course, all investments bear risks. Bitcoin arbitrage is no different. The most significant risks to Bitcoin arbitrage is counterparty risk, hacks, and currency devaluation.

Large exchanges like BitFinex, Mt. Gox (now defunct), and others have been hacked and Bitcoins have been stolen. I personally lost roughly $300 when BitFinex was hacked. Although BitBays takes security seriously (and has every incentive to do so), everyone is vulnerable to hacks.

Since Bitcoins are easily moved, are untraceable by government and are not backed by US government insurances (such as FDIC or SIPC), Bitcoins are subject to counterparty risk. While I believe Bitbays is an honest business, it is always possible that they could decide to shut down the exchange, steal everyone’s money, and go flee to some remote island country to live out their days sipping mimosa.

A third risk shared by all three funds is currency risk. If Bitcoins lose their value, the BTC fund will lose purchasing power, the same is true if dollars or yuan lose their value for those respective funds. Personally I think that BTC is too volatile for an unproven currency and so I own the USD fund. I have other investments that I believe will perform well if the dollar were to dramatically lose value and so I feel comfortable owning the USD fund.

However, with risks, generally come greater returns. I have decided the 12% is return is worth the risks that accompany Bitcoin arbitrage. However, I also don’t put all my money in this fund. I put less than 2% of my total assets in the USD Bitcoin Arbitrage fund.

How do I invest?

The way I have invested in the BitBays Bitcoin USD arbitrage fund is as follows. First, I buy Bitcoins on Coinbase. There are a variety of places where you can exchange dollars for Bitcoins but I’ve used Coinbase for years and I like it.

If you buy $100 worth of Bitcoins from CoinBase using this link you’ll get $10 in bitcoin free.

Once you’ve bought some Bitcoin on CoinBase sign up for a BitBays account using this link.

Once you have a BitBays account and have purchased bitcoin on Coinbase, transfer those coins to your wallet at BitBays, which you would then sell for dollars and then use the proceeds to buy into the USD arbitrage fund. Another option is to transfer dollars directly to BitBays, but I have always gone the route of transferring in BTC to BitBays.

I’ve been invested in the Aribtrage funds at BitBays since 17 July 2015. I think it is an interesting and so far, a profitable alternative investment. It’s important to understand the risks and make your own choice with the help of a licensed financial adviser. Decide how much risk you can tolerate to determine how much you’re willing to invest in Bitcoin arbitrage. Although it’s an interesting way to diversify your investments and does have potential for good returns, always be aware that there is a possibility of losing your entire investment.

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While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.

Comments

Interesting stuff. I, too, have dabbled in the BTC markets. Though I also have been bitten by some of the larger, well-known hacks (i.e., Mt. Gox). While I’ve found the returns great, especially when I invested the time to learn the markets, the hacks always wiped me out. So for me, the time required never really outweighed the risk + returns. Just curious what types of returns you’re seeing with these new highs? Thanks for sharing.

I’m staying away from Bitcoin and other digital currencies. It’s possible in the future I’d take a look at it, but I already don’t speculate on equities, so diving into the wild west of digital currencies probably would only result in disaster.

Erik, dangerous it is, and it’s not for everyone! I definitely wouldn’t recommend investing your life savings in it, and you could do worse by avoiding it altogether. But, if you’re itching for some adventure, there are worse alternative investments out there.

I don’t feel very safe with bitcoin. There are reports saying that Bitcoin is used by the Chinese to launder money out of China. Since China has capital controls, the only way Chinese citizens can get their money out of the country is by buying Bitcoins in China and then selling them for USD overseas.
That’s why whenever the Chinese government tries to institute Bitcoin controls, bitcoin crashes.